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Hidden Stocks for High Returns

These underrated stocks could be tomorrow's big winners

Like the song says, investors are looking for stocks to love in all the wrong places. They'll pile into the momentum stocks everyone else buys, but ignore lesser-known opportunities for fear of straying from the crowd.

Yet the search for undiscovered jewels has informed many of our Motley Fool Hidden Gems picks, from Azz to Innophos. Overlooked by Wall Street and Main Street, and thus undervalued, these stocks hold the best potential to deliver outsized returns.

The Motley Fool CAPS community knows a bargain when it sees one. Below, you'll find several under-the-radar stocks that brim with promise. These companies have garnered 100 or fewer active recommendations on CAPS, though the community thinks they still have outsized potential.

Naturally, we want you to look a bit closer at these stocks before buying. Maybe investors are staying away from these stocks for a reason so make sure there's nothing seriously wrong with the company before you plug it into your own portfolio.

Under the radarEven though Symetra Financial hit the public markets in January of this year, the diversified financial services company has been in business since 1957. As CAPS All-Star mrindependent points out, it's been profitable at returning value:

Although Symetra Financial is far from exciting, this financial services corp is consistently profitable and averages a 10% return on equity. Once investors get past the company's recent earnings miss (8.57% off the mark) I think the stock will rise from its current valuation at 0.73 times book value and 8.7 times expected earnings. Qualified for my "Out of Favor" stocks screen.

If Symetra starts outperforming the market, as virtually every CAPS member rating it believes it will, it may not fly below investors' radar for long. A whopping 100% of All-Star CAPS members who've rated the financial services specialist display similar faith in its future performance. You can join them on the Symetra Financial CAPS page and share your view on its future.

Rev those enginesAnother relatively recent IPO with less than a year's time on the market, CAMAC Energy, is trying to capitalize on two hot areas in oil: the west coast of Africa and China. Its Nigerian oil fields represent the vast bulk of its revenue.

West Africa could become a major oil producer in the years ahead. You'll find Vaalco Energy(NYSE: EGY) plying the shores of Gabon, while Hyperdynamics(NYSE: HDY) sails off West Guinea, a nascent democracy that poses risks all its own.

CAMAC has shown promise thus far, but All-Star members of CAPS are just about evenly divided on whether it can make a serious go of it. Meluvstrings thinks its China operations will ultimately win out:

Chinese natural gas will continue to grow as they need more energy to drive the machine. If they have the reserves they say, they will sell higher than this.

End of timesMaybe going right to the, er, source is the best way to test for colorectal cancer. To create a better test for the disease, Exact Sciences recently acquired the rights to two markers, obtained from a patient's stool, from Belgian biotech OncoMethylome. Although OncoMethylome acknowledges that this particular method of gathering the markers isn't optimal, it yielded the most accurate results. The company has developed a blood-based test, too.

With preclinical data to be presented at an upcoming American Association of Cancer Research meeting in late October, Exact Sciences has filed for a $150 million shelf registration for equity, debt, or other securities. The filing won't dilute shares right now, but gives Exact Sciences the chance to move quickly if conditions are right. Does that mean the company expects positive developments following the AACR meeting? CAPS member hayesaw certainly sees potential:

This company is one of those companies, speaking very fundamentally here, that started with a great idea. Assuming that the clinical trials continue to be positive (most recent one had a 100% success rate), when this product comes to the market in 1-2 years, this is the sort of company stock that could go through the roof. It could be a technology used all over the world by doctors. Price target for this stock-$30/share in 3 years.

With Sequenom(Nasdaq: SQNM), Life Technologies(Nasdaq: LIFE), and others developing diagnostic tests of their own, Exact Sciences simply can't afford to sit on its duff and wait.

Keep a high profileThese three promising stocks possess equally persuasive arguments against their success. That's why you need to look beneath the headlines and press releases, to get a fuller picture of where your money is going. Check into Motley Fool CAPS, and tell us whether these low-profile stocks are on their way to higher returns.

Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.

Author

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow him on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.